"We continue to execute on our growth and diversification strategy, as we capitalize on our expanding opportunities in Sensors, Test Services and Test equipment targeted toward the materials and structures sectors, as well as new market opportunities from our acquisition of E2M late in our first quarter. The success of these efforts is reflected in our strong year-over-year orders performance and an outstanding backlog position of
$515 million
, which far exceeded not only our prior year position, but also our fiscal year 2018 year-end backlog of
$415 million
.

Our Sensors business achieved another record orders level of
$98 million
in the quarter, representing a book-to-bill of 1.26, in part driven by the second purchase order associated with our U.S. Department of Defense contract.

Our Test & Simulation business delivered nearly 15% orders growth year-over-year, driven by our strong technology position associated with advanced materials test systems, as well as structural test systems which simulate seismic events and other unique operating environments for civil infrastructure and wind energy systems. In addition, E2M, with their excellent technology position and approvals, brings us continued opportunity for exciting growth in the flight simulation and entertainment markets.

Given the volume and quality of the orders we experienced in our first quarter of the fiscal year and our record backlog position, we are confident in our ability to deliver on our commitments to growth and expanded profitability in fiscal year 2019 and beyond."

HIGHLIGHTS FOR THE 2019 FIRST FISCAL QUARTER

Revenue

Revenue was
$203.2 million
, up 4.6% compared to the same prior year period, driven broadly by growth in both business units, along with approximately one month contribution from the acquisition of E2M which closed in late
November 2018
.

Orders

Test & Simulation orders for the quarter were
$125.1 million
, up 14.6% compared to the same prior year period, driven primarily by a large order in the structures sector of our Test & Simulation business with increased demand across all market sectors, and particularly strong growth in the Americas region.

Sensors orders for the quarter were
$98.2 million
, representing a 27.8% increase over the same prior year period. This growth shows continued strength in our Sensors test and position sectors and was driven incrementally by the second purchase order associated with the U.S. Department of Defense, which was funded up to an additional
$20 million
in the quarter, as well as continued demand for our position sensors.

Earnings Before Taxes

Earnings before taxes of
$11.2 million
was up
$1.7 million
compared to the same prior year period. This earnings increase was driven by lower Test & Simulation operating expenses and growth in Test & Simulation gross profit, partially offset by
$0.8 million
of acquisition-related expenses and a
$0.4 million
acquisition inventory fair value adjustment. Efforts to reduce our operating expenses resulted in a
$1.1 million
reduction compared to the same prior year period. Excluding acquisition-related costs, operating expenses declined
$1.9 million
.

Net Income and Diluted Earnings Per Share

Diluted earnings per share was
$0.54
compared to
$1.72
in the same prior year period on net income of
$10.5 million
and
$33.2 million
, respectively. First quarter of fiscal year 2019 results were impacted by
$0.04
of non-recurring costs associated with the acquisition inventory fair value adjustment and acquisition-related expenses. Conversely, results for the first quarter of fiscal year 2018 reflect a reduction in the effective tax rate and discrete benefits stemming from the Tax Cuts and Jobs Act of 2017 (the Tax Act). The Tax Act provided a
$0.07
benefit in the first quarter of fiscal year 2019, as compared to a
$1.32
benefit in the first quarter of fiscal 2018.

Adjusted EBITDA

Adjusted EBITDA of
$30.1 million
grew 12.0% from the same prior year period. This growth was primarily due to lower Test & Simulation operating expenses, higher Test & Simulation gross profit and approximately one month contribution from the acquisition of E2M. A reconciliation of Adjusted EBITDA, a non-GAAP financial measure, to net income, the most directly comparable GAAP financial measure, is provided in Exhibit C of this earnings release.

Capital Structure

During the quarter, our total debt balance increased by
$77.7 million
, primarily due to the acquisition of E2M which closed in late November and was financed by drawing approximately
$80 million
on our Revolving Credit Facility. In addition, we made
$3.7 million
of mandatory debt payments during the first quarter of fiscal year 2019. With the expected Adjusted EBITDA growth from E2M and our strong backlog position at the end of the quarter, we anticipate a net reduction in our leverage ratio between now and the end of fiscal year 2019.

Dividend

The Board of Directors declared a quarterly dividend of $0.30 per share. The dividend was payable on December 31, 2018 to shareholders of record as of the close of business on December 17, 2018. This was our 148
th
consecutive quarterly dividend.

OUTLOOK

Test & Simulation Business

Overall, the outlook in our Test & Simulation business remains positive, particularly in our core markets of materials and structures, test services and the broad based need for intelligent machines that can simulate complex operating environments. The addition of E2M brings to us exposure to flight simulation, entertainment and other advanced simulation markets that will further expand our growth opportunities for this business. The underlying growth drivers include the rapidly growing application of advanced carbon fiber composites in flight and ground vehicles, continued growth in the use of additive manufacturing, and expansion in wind energy and civil infrastructure that is more resistant to damage from powerful earthquake, sea and storm events. In addition to our exciting growth opportunities, we continue to invest in operational efficiency initiatives to improve profitability and in new products and technologies to generate the highest demand for Test & Simulation products and services in the coming year.

Sensors Business

Strong demand in the Sensors business is anticipated to continue during fiscal year 2019 across all sectors, driven by accelerating new product introductions across all major markets and geographies, and expanded opportunities associated with the U.S. Department of Defense. This combination of positive factors is expected to yield annual, double-digit top line growth, along with Adjusted EBITDA expansion for the Sensors business in fiscal year 2019.

Consolidated

Based on these factors, we maintain our expected outlook for fiscal year 2019 including:

A reconciliation of Adjusted EBITDA and Adjusted diluted earnings per share, non-GAAP financial measures, to net income, the most directly comparable GAAP financial measure, for the above outlook is included in Exhibit E and F of this earnings release, respectively.

FIRST QUARTER CONFERENCE CALL

As announced on
January 21, 2019
, a conference call will be held on February 4, 2019 (today), at
11:00 a.m. ET
(
10:00 a.m. CT
). Dr.
Jeffrey A. Graves
, President and Chief Executive Officer, and
Brian T. Ross
, Senior Vice President and Chief Financial Officer, will host the call, which will include a question and answer session after prepared remarks.

A transcript of the call can also be accessed from the MTS website at
http://investor.mts.com
beginning on
February 5, 2019
.

ABOUT MTS SYSTEMS CORPORATION

MTS Systems Corporation's testing and simulation hardware, software and service solutions help customers accelerate and improve their design, development and manufacturing processes and are used for determining the mechanical behavior of materials, products and structures. MTS' high-performance sensors provide measurements of vibration, pressure, position, force and sound in a variety of applications. MTS had 3,400 employees as of September 29, 2018 and revenue of
$778 million
for the fiscal year ended September 29, 2018. Additional information on MTS can be found at
www.mts.com
.

NON-GAAP FINANCIAL MEASURES

We believe that disclosing adjusted diluted earnings per share, which is diluted earnings per share excluding the impact from restructuring expenses, acquisition-related expenses and the acquisition inventory fair value adjustment is useful to investors as a measure of operating performance. We use this as one measure to monitor and evaluate operating performance. Adjusted diluted earnings per share is a financial measure that does not reflect United States Generally Accepted Accounting Principles (GAAP). We calculate this measure by adding back the after-tax effect of the restructuring expenses, acquisition-related expenses and the acquisition inventory fair value adjustment to net income and dividing the result by the diluted weighted average shares outstanding.

We believe that disclosing earnings before interest, taxes, depreciation and amortization (EBITDA) and EBITDA excluding the impact from stock-based compensation, restructuring expenses, acquisition-related expenses and the acquisition inventory fair value adjustment (Adjusted EBITDA) is useful to investors as a measure of leverage and operating performance. We use these measures to monitor and evaluate leverage and operating performance. EBITDA and Adjusted EBITDA are financial measures that do not reflect GAAP. We calculate EBITDA by adding back interest, taxes, depreciation and amortization expense to net income. Adjusted EBITDA is calculated by adding back stock-based compensation, restructuring expenses, acquisition-related expenses and the acquisition inventory fair value adjustment to EBITDA.

We believe that disclosing free cash flow is useful to investors as a measure of operating performance. We use this measure as an indicator of the Company's strength and ability to generate cash. Free cash flow is a financial measure that does not reflect GAAP. We calculate free cash flow as net cash provided by (used in) operating activities less purchases of property and equipment and businesses, net of cash acquired plus cash proceeds from sale of property and equipment.

Investors should consider these non-GAAP financial measures in addition to, not as a substitute for or better than, financial measures prepared in accordance with GAAP. Reconciliations of the components of these measures to the most directly comparable GAAP financial measures are included in Exhibits B, C, D, E and F of this earnings release.

FORWARD-LOOKING STATEMENTS

This release contains "forward-looking statements" made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995 that are subject to certain risks and uncertainties, as well as assumptions, that could cause actual results to differ materially from historical results and those presently anticipated or projected. Statements made under the heading "Outlook" are forward-looking statements, and words such as "may," "will," "should," "expects," "intends," "projects," "plans," "believes," "estimates," "targets," "anticipates," and similar expressions identify forward-looking statements in other parts of the release. Such statements include, but are not limited to, statements about future financial and operating results, plans, objectives, expectations and intentions, statements about the opportunities and outlook for our Sensors and Test & Simulation sectors and other statements that are not historical facts. These statements are based on our current expectations and beliefs and are subject to a number of risks, uncertainties and assumptions that could cause actual results to differ materially from those described in the forward-looking statements. Risks, uncertainties and assumptions that could cause our actual results to differ materially from those discussed in the forward-looking statements include, but are not limited to, those described in the "Risk Factors" section of our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") and updated in any subsequent Quarterly Reports on Form 10-Q and other filings with the SEC. The reports referenced above are available on our website at
www.mts.com
or on the SEC's website at
www.sec.gov
. Forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events or circumstances.

MTS SYSTEMS CORPORATION

Consolidated Statements of Income

(unaudited - in thousands, except per share data)

Three Months Ended

December 29, 2018

December 30, 2017

Revenue

Product

$

175,078

$

169,241

Service

28,103

24,921

Total revenue

203,181

194,162

Cost of sales

Product

108,168

100,494

Service

16,708

15,740

Total cost of sales

124,876

116,234

Gross profit

78,305

77,928

Gross margin

38.5

%

40.1

%

Operating expenses

Selling and marketing

32,089

32,028

General and administrative

21,078

20,562

Research and development

7,172

8,841

Total operating expenses

60,339

61,431

Income from operations

17,966

16,497

Operating margin

8.8

%

8.5

%

Interest expense, net

(6,818)

(6,804)

Other income (expense), net

49

(223)

Income before income taxes

11,197

9,470

Income tax provision (benefit)

696

(23,681)

Net income

$

10,501

$

33,151

Earnings per share

Basic

Earnings per share

$

0.55

$

1.73

Weighted average common shares outstanding

19,216

19,124

Diluted

Earnings per share

$

0.54

$

1.72

Weighted average common shares outstanding

19,556

19,254

Dividends declared per share

$

0.30

$

0.30

MTS SYSTEMS CORPORATION

Condensed Consolidated Balance Sheets

(unaudited - in thousands)

December 29, 2018

September 29, 2018

ASSETS

Current assets

Cash and cash equivalents

$

70,438

$

71,804

Accounts receivable, net

115,384

122,243

Unbilled accounts receivable, net

60,656

70,474

Inventories, net

183,465

139,109

Other current assets

30,085

24,572

Total current assets

460,028

428,202

Property and equipment, net

89,266

90,269

Goodwill

402,152

369,275

Intangible assets, net

288,076

246,138

Other long-term assets

8,342

5,512

Total assets

$

1,247,864

$

1,139,396

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities

Current maturities of long-term debt, net

$

30,462

$

32,738

Accounts payable

49,191

47,886

Advance payments from customers

101,367

80,131

Other accrued liabilities

76,247

78,358

Total current liabilities

257,267

239,113

Long-term debt, less current maturities, net

435,586

355,640

Other long-term liabilities

81,676

66,711

Total liabilities

774,529

661,464

Shareholders' equity

Common stock, $0.25 par; 64,000 shares authorized: 17,872 and 17,856 shares issued and outstanding as
of December 29, 2018 and September 29, 2018, respectively